Elmer Kilian hangs a wooden shingle outside his home during tax season, as he has for the past 30 years.

IRS Protectionism: New Licensing Scheme Challenged in Major Federal Lawsuit

Arlington, Va.—Tuesday is Tax Day. And as that deadline approaches, the IRS remains committed to an unlawful licensing scheme that benefits powerful industry insiders and could affect nearly one hundred million taxpayers—and more than 350,000 independent tax return preparers.

IRS Commissioner Douglas Shulman revealed in a speech last week that the licensing scheme was designed to provide the IRS with “leverage” to exert even more power and control over taxpayers (and tax return preparers). Shulman also admitted that, “[i]t’s a small number of people that are unscrupulous, but those are people that we need to make sure we’re focused on,” even though this sweeping set of regulations affects hundreds of thousands of tax preparers. Shulman failed to explain why the IRS could not simply isolate these few problematic preparers using recently mandated preparer tax identification numbers (PTINs), which enable the IRS to identify suspicious patterns in tax returns filed by the same preparer.

“Commissioner Shulman’s comments make clear that the IRS is using the excuse of ‘a few bad apples’ to impose a sweeping and unlawful licensing scheme on hundreds of thousands of honest American entrepreneurs,” said Attorney Dan Alban of the Institute for Justice, the nation’s leading legal advocate for the rights of entrepreneurs. “The IRS already has the tools to identify and prosecute problem preparers, and does not need or have the legal authority to impose this licensing scheme.”

The unlawful new regulations, which were imposed last year and take effect this tax season, force tax preparers to get IRS permission before they can work. The burden of compliance will fall most heavily on independent tax return preparers and small businesses. The regulations require every paid tax return preparer—except for attorneys, CPAs and several categories of “enrolled agents”—to become a “registered tax return preparer” by paying extra fees, passing a government exam, and taking 15 hours of continuing education classes every year.

Unsurprisingly, big tax preparation firms, such as H&R Block and Jackson Hewitt, support the licensing scheme. As The Wall Street Journalexplained: “Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.”